Want a small business loan? Think like a banker

Stingy. Overly conservative. Flush with money but not willing to help the average business owner.

These are common remarks we hear about banks.

Most of these comments come from a common misconception that banks are in the risk-taking business. Actually, nothing could be further from the truth.

Making loans is simply the process of renting out other people’s money, which requires that you get back most of the money most of the time.

Consider this: When a bank lends $1 million of the depositors’ money, after paying the depositors interest for putting their money in the bank and paying the costs of running the operation, they make a profit of about 1 percent on the loan — or $10,000. Put another way, if a bank makes a bad loan, they have to make 100 loans to get back to even. So it makes sense that the banks don’t like to take many risks.

Wondering what this has to do with you? A lot.

Bankers have something they call the Five C’s when assessing risk. If you understand how they look at your business and approach risk, you are much more likely to get a loan by making your business appear less risky. Before going to the bank for a loan, consider all of the “C’s,” what they mean and what you should do to mitigate them.

Capacity: How will you generate the cash to pay back the loan? Bankers want to make loans, get paid back and make more loans. Help the banker understand where cash will be coming from and why there will be a solid cash flow.

Collateral: This is the back-up plan. Should the loan go bad, the banker will sell your collateral (your accounts receivable, inventory, equipment and/or home) to recover as much of the money as possible. Be prepared to help the banker understand the value and liquidity of your collateral. If I can’t repay you, Mr. Banker, this is how you will get the money back.

Character: Banks want to lend to people who have good character and will repay their loans. Do you have a family member who has failed to pay back loans in the past? Are you going to lend to him again? Of course you won’t and neither will bankers. They want to loan to people with a history of repaying loans. Monitor your credit score and maintain a good one whenever possible. If you’ve had a bad situation in the past, be prepared to help the banker understand why it occurred and how it has changed.

Capital: Do you have some skin in the game? Bankers want to see that your butt is on the line financially along with theirs. So leave some money in your company and, when possible, put in additional funds. If you’re not willing to put your wealth at risk, why should the banker?

Conditions: In other words, why do you want the money and what is the risk of loss? Your reason for asking needs to be a good one. Is it something they want to help you achieve, such as having working capital, buying equipment, etc.? This also applies to the overall environmental factors that are impacting your company — things like competitive forces, strength of the customer base, supply risks, and industry risks. Be prepared to help the banker understand why your business will be stronger and more profitable because of the money the bank will be lending.

If you know how bankers think, you can give them what they want. And if you give them what they want, they just may give you what you want — a loan.

Laddie and Judy Blaskowski are co-owners of Business Truths, a Springs-based small business consulting firm. Reach them at Laddie@businesstruths.com

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